Osisko cofounder Wares praises private equity, scolds debt financiers, nips NIMBYism

FINANCING | Asset managers increase stakes in mining as green metals advance

BY COLIN MCCLELLAND

New York, NY — Osisko

Metals (TSX: OM; USOTC: OMZNF) is part of a rising trend tapping private equity to help build projects, but it’s wary of the growing role of “predatory” debt financing.

Appian Capital Advisory, a London-based private equity firm with mining projects valued at US$3.6 billion, is investing $25 million for a quarter of Osisko’s Pine Point zinc-lead mine in the Northwest Territories.

Appian is to hold 60% of the project after spending $100 million as it covers costs until a final investment decision, Osisko chairman and CEO Robert Wares told The Northern Miner in an interview in New York in May at the Society for Mining, Metallurgy & Exploration’s eighth annual Trends in Mining Finance Conference.

“As a business model for a junior developer, quite honestly, I could do this repeatedly. Find good projects, drill them off, define a significant resource and private equity groups like Appian are often willing to step in,” Wares said.

“If we retain 40-50% free carried to mine build, what’s wrong with that? If I do that multiple times, I’m still building great value for shareholders and we’ve got partners who are going to finance the mine and spare shareholders excessive dilution.”

Osisko Metals, part of a group of companies including Osisko Gold Royalties (TSX: OR; NYSE: OR), Osisko Mining (TSX: OSK) and Osisko Development (TSXV: ODV; NYSE: ODV) started by the same team that developed the Canadian Malartic gold mine, now the country’s largest, is embracing private equity as a solution for junior base metals companies that may not earn enough support from equity markets.

Private equity investing in Canadian mining companies was just

$44 million last year out of $10 billion across all industries, according to the Canadian Venture Capital and Private Equity Association. But asset managers such as New York-based Orion Resource Partners with US$8 billion under management and pension funds like the Ontario Teachers with $247 billion in assets are increasingly structuring deals like private equity with dominant lender status, loans convertible to equity stakes and double-digit returns targeted.

Last year Orion invested US$375 million in Sabina Gold & Silver (TSX: SBB; US-OTC: SGSVF), which was recently bought by B2Gold (TSX: BTO; NYSE: BTG), and the pension fund is pitching in $200 million for Foran Mining’s (TSXV: FOM; US-OTC: FMCXF)

McIlvenna Bay copper project in Saskatchewan.

Osisko’s other main investment is the Gaspé copper project in Quebec which it’s buying from Glencore (LSE: GLEN) in a deal expected to close next month. It’s another past-producing site with power lines and roads, plus access to a deep water port compared with a railway near Pine Point. Drilling up to 10,000 metres this year at both sites is continuing, with feasibility studies due on each by the end of next year, Wares said.

Pine Point boasted a town of 2,000 people on the south shore of Great Slave Lake around 90 km east of Hay River when Cominco, now part of Teck Resources (TSX: TECK.A/TECK.B; NYSE: TECK), mined about 10 million tonnes of lead and zinc from 1965 to 1988. The mine closed and the town was dismantled after zinc prices fell.

Osisko bought the property in 2018 and last year’s preliminary economic assessment shows the project has a net present value of $602 million at an 8% discount rate with a 25% internal rate of return. Pine Point is expected to produce 329 million lb. zinc and 141 million lb. lead annually over 12 years. Total revenue after a royalty is forecast at $5.6 billion.

Pre-production spending is estimated at $653 million. Wares figures Osisko’s share will be about $280 million, but raising the cash from sales of new shares would be too dilutive because the market’s valuations of base metals projects are too low, he said. However, he’s finding debt financiers want the whole project as collateral when he just wants to borrow smaller amounts to start production.

“I’m not going to offer the whole project as a guarantee for $30 to $50 million. That’s absurd. I’ve been through this three times now,” he said. “These debt deals are preda- tory and they put your entire project at risk. If you sign off on that you’re desperate.”

Earlier debt

The battery metals-driven surge of interest in mining has seen debt financiers increasingly offering to fund projects as early as feasibility studies when they used to wait for permits, Wares said. Juniors need to ensure the agreements prevent stock dilution, he said.

With brownfield sites come the risk of inheriting environmental problems. Wares says the territory has told him responsibility for some zinc and lead contamination of a former rail line at Pine Point lies with Teck and the government. He says he’s had experience with cleanups, such as Barrick Gold’s (TSX: ABX; NYSE: GOLD) legacy at Canadian Malartic.

“The tailings ponds were acidgenerating, so we integrated remediation into our disposal,” he said. “You’d be surprised, but on brownfield sites whatever additional remediation needs to be done can often be integrated into your mine plan, and that’s the best way you get your permit.”

At Gaspé, Noranda produced 150 million tonnes of copper concentrate from 1955 until the mine closed in 1999. The population of Murdochville fell to 600 from 3,000 but a new generation is now concerned their outdoor lifestyle could be threatened by a revived mine, Wares said. Osisko, wary of professional mining opponents flooding the community with misinformation, immediately said there would be five years of studies before any potential mining.

“Now they feel there’s time for discussion, planning, transparency and coming up with a plan that’s going to incorporate the community and everyone’s concerns,” he said. “The best way to fight NIMBYism is to be transparent and nip it in the bud before it becomes a problem.” TNM

How to invest in lithium explorers: pitfalls and pointers

BATTERY METALS | Understand geology, avoid ‘close-ology,’ check assays

BY COLIN MCCLELLAND

New York, NY — Exploring for lithium, a key component in electric vehicle batteries, is all the rage as companies seek to plug the gap between low supplies and surging demand to fuel the green energy transition.

The 700,000 tonnes of lithium mined globally last year will need to nearly quadruple to 2.7 million tonnes by 2030, requiring an investment of US$95 billion to meet supply needs, according to Hatch, a global engineering consultant based in Toronto.

But how to invest in lithium explorers, the small companies on the front edge in countries such as Chile, Argentina, Canada and the United States? Koby Kushner, CEO of Libra Lithium with 290 sq. km of claims near Thunder Bay in northwestern Ontario, says investors need a checklist on geology, company structure and assay results.

“There’s a lot of investment opportunities to pick from if you’re trying to play grassroots lithium exploration,” Kushner said this month at the Society for Mining, Metallurgy & Exploration’s eighth annual Trends in Mining Finance Conference in New York. “Therefore, it’s very important to learn at least a little bit about the geology.”

Lithium is mined either from a brine pumped to the surface and left in settling ponds for months, or from hard rock sources such as spodumene. Brine-borne lithium is predominant in Chile, Nevada and Alberta, while hard rock lithium is found in Australia, Quebec and Ontario. Spodumene is found in pegmatites produced under heat and pressure from granites, though not all pegmatites contain lithium.

In May, Kushner’s privately-held Libra began surveying 50 pegmatite targets on its Flanders North project. It’s one of eight projects held by the Toronto-based explorer.

“What’s key is that lithium mineralization is spatially related to this granite,” said Kushner, who worked as a mining engineer for Barrick Gold (TSX: ABX; NYSE: GOLD) and an equity analyst for Red Cloud Securities. “Generally, there’s a Goldilocks zone about 3 to 4 km away.”

Close-ology woes

The danger is relying on so-called close-ology, staking claims just because they’re near properties with demonstrated potential, like the swarm of activity around Patriot Battery Metals’ (TSXV: PMET; ASX: PMT; US-OTC: PMETF)

Corvette project in Quebec, Kushner said. All the land within a 20-km radius is staked, but many of the claim packages are full of granite which is less prospective ground, and the companies are still getting funded, he said.

Another factor to consider is how some companies hold huge blocks of land to prospect but may be under obligation to spend hefty amounts within a few years on exploration or development that they may not be able to cover. Companies should generate projects in-house to avoid expensive option agreements while investors should beware of management teams that flock to whatever is optionable, he said.

“My simple filter is ‘OK, was the CEO — he or she — previously in cannabis or crypto?’ If so, I’m out.”

Investors should also be wary of reports of high lithium content in lake sediments, a commonly used indicator in Canada after the government conducted a survey, but unreliable because the lithium could have traveled, and its source is unclear.

Assays of pegmatites also have a limit to how much lithium oxide they can hold, which is about 8%. When a company reports 12%, red flags should wave, the analyst said.

“You get a lot of people that are chasing that pot of money and not everyone is in this to do genuine exploration,” Kushner said. “A lot of people are in it because they can raise money, you know, maybe buy a second vacation home.” TNM